When CEOs and boards begin to look for an M&A Advisor, they often start in one of the big financial centers like New York or Boston. For most transactions under $100 million, I believe an M&A Advisor more than a couple of hours away by car is usually a bad choice.
One of the dirty secrets in the M&A Advisory business is large number of M&A Advisory engagements that fail to result in a successful transaction. It’s impossible to find statistics on this. Every M&A Advisory firm keeps their failure rate a closely guarded secret – many probably don’t even calculate their failure rates.
For over a couple of decades now, I have been asking every CEO, board member and investor I know to share their M&A successes and failures. My twenty years in YPO also provided a broad perspective on M&A transactions, both successes and failures.
Most Planned M&A Transactions Fail (under $100 million)
I used to think that at least half of M&A transactions failed. As I learned more, I realized that the percentage of times a planned exit fails to result in the company being sold is closer to 75%.
Failure Increases with Distant M&A Advisers
After hearing first hand about the success or failure of over a hundred transactions, I realized there were several patterns. One is that the M&A transaction failure rate increases as the distance between the company and the M&A Advisor increases.
The reason the success rate decreases with distance is that the relationship between an M&A Advisor and a company, CEO, board, their accountants and their lawyers is intimate and intense. Even the smartest M&A Advisor needs a considerable amount of time to really understand the value drivers in a company, its strategic value and who the best potential buyers are. Much of this work has to be done face to face at the company.
The middle part of an M&A Advisor’s job can be done remotely – the prospecting, qualifying and sales funnel building. But in the latter stages of the M&A process, during the auction, negotiation and closing, the M&A Advisor will be working close to full time to help the CEO and board close the transaction. Most of this work also has to be done in the same city as the company. This is partly because the selling company’s lawyers and accountants are usually in the same city as the company.
Another reality of M&A transactions is that inevitably, ‘stuff happens’. In some of the transactions I’ve been involved with, the deal looked like it was dead several times. These ‘near death experiences’ require immediate action to resuscitate. It might require reconsidering the entire transaction strategy, working through an unexpected snag in the agreement and/or working through the business – and psychological – implications of whatever deal factor that’s changed. This type of work is almost always unexpected, and requires face to face action on short notice. That’s just less likely to happen if the M&A Advisor has to factor in travel and hotels. Failing to resolve even one of these potentially fatal challenges usually means the transaction is dead.
The really good M&A Advisors factor this in and will plan to spend up to half of their time in the same city as the company during the first third of the process and be ready to spend most of their time in the same city during the last third.
There are M&A Advisors who claim they can do most of the work remotely - with only weekly visits to the company. Those are the ones that CEOs and boards should be wary of. Even in today’s hyper connected world, you cannot do a really good job as an M&A Advisor without a great deal of face time.
From the observations I’ve made, I believe the failure rate doubles with distant M&A Advisors. In other words, a hypothetical company using a remote M&A Advisor might have a failure rate of 50%, but with a local advisor the failure rate might only be 25%. For another company, the failure rates might only be 40% and 20% respectively.
Please keep in mind that these are very approximate percentages based on observations. There simply are no databases of exit transactions and M&A Advisor distance that could be used to precisely quantify this effect.
Distance Matters Less When Transactions are over $100 million
From what I’ve seen, this effect is significantly reduced when transactions are over $100 million. When an M&A Advisory firm is working on a transaction over $100 million, the fees are usually a few million. There are also often two, or three, senior individuals involved with deals over $100 million.
When the fees are in the multi-million dollar range, the M&A Advisors can afford to fly to the company almost every week and spend most of their time in hotels for many months. It’s also easier on their lives if they can split this between two or three senior people.
But this just doesn’t happen when the fees are below a million dollars. For sub-million dollar fee transactions, there is almost always only one senior person on each transaction. The economics, and human costs, just can’t justify more people, or the travel required, on smaller deals.
The A-Team Usually Works on the Largest Transactions
Another dirty secret, or obvious reality, depending on your perspective is that the best people in each firm will be working on the most valuable engagements. It’s also well known that the people the client meets during the sales process are often not the ones that will be doing the work after an engagement is signed. Similarly, many firms will put their B team, or even their trainees, on the assignments that are farthest from their office.
Reputation is also More Heavily Weighted Locally
This is where another dirty secret of the M&A Advisor business comes into play. Professional M&A Advisors know that every deal doesn’t end up closing. They build their business models, and manage their sales funnels and calendars, based on their knowledge that somewhere between a third, and two thirds, of the deals they sign up to do will probably fail. These M&A Advisors will still do OK on the deals that fail because their direct costs will be covered by the work fee.
Part of optimizing their business is knowing when to stop working with a company because the probabilities of success are too low. This is usually 6 to 9 months after they sign the M&A engagement. At that point, if the transaction looks like it’s not going to close soon, many M&A Advisors will reduce the amount of time they spend on the company. Instead they’ll devote their time to other companies with new work fees and higher probabilities of success.
This is Especially Likely When the First LOI Doesn’t Close
In every M&A transaction, the company has to select a single prospective buyer when it’s time to accept an offer and sign an LOI (letter of intent). At that point, they have to contact the other interested parties on the short list and tell them they cannot continue discussions with them.
From the time the LOI is signed to closing is often around three months. If the deal falls apart after a month or two, the other prospective buyers have usually moved on to other opportunities and it’s usually quite difficult to get them back to the table.
When this happens, the M&A Advisor has to go back and rebuild the entire sales funnel. This is when I’ve seen many M&A Advisors throw in the towel – especially when they’re busy.
The challenge in rebuilding the funnel is that the M&A Advisor will have already contacted most of the best prospects. If they have to go back to the same buyers, the perception will be that they did not succeed the first time. This makes it much more difficult to build momentum on the second pass. It’s also psychologically much more difficult for the M&A Advisor. So they’ll be inclined to move on to a ‘fresh’ deal and blame the failure on the company, valuation expectations or a ‘difficult’ CEO or board.
It’s Much Easier to Give Up on a Remote Company
It is just easier for an M&A Advisor to give up on a company that is further from their office. When M&A transactions fail, quite a few people will hear about it. But those people are usually geographically close to the company. The negative impact to the M&A Advisor’s reputation will be similarly localized.
If the M&A Advisor is geographically close to the company, they will be much more likely to persevere to protect their reputation.
This is another factor that is much less important for transactions over $100 million. With these larger opportunities, local effectively translates to most of the country.
For Under $100 Million You Really Should Chose a Local M&A Advisor
Many CEOs and boards engage remote M&A Advisors because they think that somebody from New York or Boston must be better than someone who lives within driving distance. Or they believe that domain expertise is an important selection criterion (more on that myth in a future post). In my experience, the perceived benefits are mostly psychological – it’s like that old adage about a consultant just being a regular guy a long way from home.
The difference in a simple consulting job might not be significant, but when it’s your company being sold, and it’s under $100 million in value, I believe you really should chose an M&A Advisor close to home.